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Managerial Legacies, Entrenchment and Strategic Inertia

47 Pages Posted: 24 Mar 2005 Last revised: 27 Mar 2010

Catherine Casamatta

TSE-University of Toulouse 1

Alexander Guembel

Toulouse School of Economics, University of Toulouse Capitole

Date Written: March 25, 2010

Abstract

This paper argues that the legacy potential of a firm's strategy is an important determinant of CEO compensation, turnover and strategy change. A legacy makes CEO replacement expensive, because firm performance can only partially be attributed to a newly employed manager. Boards may therefore optimally allow an incumbent to be entrenched. Moreover, when a firm changes strategy it is optimal to change the CEO, because the incumbent has a vested interest in seeing the new strategy fail. Even though CEOs have no specific skills in our model, it can explain the empirical association between CEO and strategy change.

Keywords: Reputational concerns, CEO turnover, compensation

JEL Classification: D82, G30, J33

Suggested Citation

Casamatta, Catherine and Guembel, Alexander, Managerial Legacies, Entrenchment and Strategic Inertia (March 25, 2010). Journal of Finance, Forthcoming; AFA 2006 Boston Meetings Paper. Available at SSRN: https://ssrn.com/abstract=681226 or http://dx.doi.org/10.2139/ssrn.681226

Catherine Casamatta

TSE-University of Toulouse 1 ( email )

Place Anatole-France
Toulouse Cedex, F-31042
France

Alexander Guembel (Contact Author)

Toulouse School of Economics, University of Toulouse Capitole ( email )

Manufacture des Tabacs
21, allee de Brienne
Toulouse, 31000
France

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